Dan Martell - How to Evaluate a SaaS Business For Acquisition

00:00:00.000 Hey there, Dan Martell here,

00:00:01.040 serial entrepreneur, investor, and creator of SaaS Academy.

00:00:03.840 In this video, I'm gonna share with you

00:00:05.440 how to evaluate a SaaS business for acquisition

00:00:10.080 so you don't buy a dud and make sure

00:00:12.880 that you get a return on your investment

00:00:15.520 that you're looking for.

00:00:16.920 Be sure to stay at the end where I also share with you

00:00:19.020 how to get access to my Idea to Exit mini course.

00:00:22.080 Essentially, this is a six module mini course

00:00:25.760 where I go over about how to come up with the right idea,

00:00:28.260 how to launch it, how to pre-sell it,

00:00:30.020 get your customers to finance it,

00:00:31.740 how to hire developers and make sure that you build

00:00:35.000 the right launch strategy to get customers.

00:00:37.760 If you want to build something yourself,

00:00:39.380 I'm gonna share with you the link at the end of this video.

00:00:54.320 So buying and selling SaaS businesses is my jam.

00:00:57.820 I've actually been involved in exiting three of my own

00:01:00.720 companies, so on the seller side.

00:01:03.300 And I've helped hundreds of other companies go through

00:01:06.020 the process and I'm also an investor in a private equity

00:01:09.100 fund that is always looking at buying other SaaS businesses.

00:01:13.340 So I have looked at hundreds of deals and figured out over

00:01:17.980 the years how to evaluate them properly.

00:01:19.900 And recently I had my buddy Mark reach out to me because he

00:01:22.720 has an existing business, an agency, and he had a software

00:01:26.440 company reach out to them to potentially buy them because

00:01:29.200 they're kind of no longer passionate about the idea.

00:01:31.280 They don't want to shut it down but they're moving in a

00:01:33.820 different direction.

00:01:34.580 They wanted to know because it had an alignment with their

00:01:36.680 customer base if they wanted to buy it.

00:01:38.580 So he pinged me, text message, hey Dan, I got a SaaS business.

00:01:42.080 They're looking to sell.

00:01:43.160 What should I ask?

00:01:44.000 So what I wanted to do is kind of talk about the four high

00:01:47.120 level areas of the business you should be looking at in the

00:01:51.460 early stages.

00:01:52.140 This is not meant to be a complete exhaustive list but this

00:01:55.140 is gonna save you a ton of time

00:01:57.040 because you can just get, you know, with these four areas,

00:01:59.880 you could probably filter and qualify them

00:02:01.720 out of even being an opportunity

00:02:03.880 instead of spending all this money and time on due diligence.

00:02:06.980 Number one, the numbers.

00:02:08.720 There's a few key numbers you wanna look at

00:02:10.880 when you're buying a software as a service business.

00:02:13.900 Number one is churn.

00:02:15.360 So depending on the size of the customer deals, right,

00:02:19.740 so it's called SMB, which is usually zero to 10,000 a year

00:02:23.200 in annual contract value or mid-market,

00:02:26.000 which is about 10 to 100,000.

00:02:28.440 Annual contract value or 100,000 plus is enterprise.

00:02:30.800 You wanna look at what segment of the market they serve

00:02:33.200 and the churn number that they're at today.

00:02:35.540 Now, I can't give you specifics

00:02:37.840 because those ranges are so wide,

00:02:40.020 but you can Google online what is the average churn numbers

00:02:43.280 for different sizes of the markets

00:02:44.520 to figure out if the product you're buying is in that range.

00:02:47.460 But I wanna tell you, if they're at 20% monthly churn,

00:02:51.820 then right off the bat,

00:02:53.020 that's not a good business to buy, right?

00:02:54.980 There's no company that doesn't have a solution

00:02:57.320 that keeps their customers typically

00:02:59.100 for at least a year, a little over a year,

00:03:01.060 and ideally a whole lot longer than that.

00:03:03.640 So that's the first thing is the churn number.

00:03:05.200 Second is lifetime value of a customer.

00:03:07.100 What's the average customer worth to them

00:03:09.700 over the period of time that they're a customer?

00:03:13.040 Because that is really the annuity.

00:03:14.880 And the reason why LTV is so important

00:03:16.220 because in there is baked expansion revenue.

00:03:18.880 If the product's well built,

00:03:20.480 There's probably opportunities to add other modules

00:03:22.620 or add-ons or down-sells that you can increase

00:03:25.280 the total share of wallet with that customer

00:03:27.660 or that account so that even if you have churn,

00:03:30.460 you might have expansion revenue that outpaces that churn.

00:03:32.840 Then you have a beautiful thing called net negative churn.

00:03:35.120 Don't mean to complicate it.

00:03:36.080 I apologize.

00:03:37.000 Going back to normal business stuff.

00:03:40.680 Sorry, I went super geeky on you.

00:03:42.620 The reality is it's just ask them

00:03:44.120 what the lifetime value of the customer is.

00:03:45.500 That'll give you an indication

00:03:46.480 on how healthy the business is.

00:03:47.940 And then finally, CAC, your cost to acquire a customer.

00:03:51.380 How have they been able to acquire customers?

00:03:53.040 How many people sign up for free trials or new customers

00:03:55.820 do they get through their current marketing initiatives?

00:03:58.080 And what are they spending on executing

00:04:00.360 those marketing initiatives?

00:04:01.320 Either blog content, paid acquisition,

00:04:03.860 partner affiliate deals, that kind of thing.

00:04:05.820 Just ask those three numbers.

00:04:07.260 What's your churn, what's your LTV,

00:04:08.720 and what's your CAC for a customer?

00:04:11.200 Number two, source code.

00:04:13.140 At the end of the day, the last thing you want

00:04:15.440 is to buy something that is a rat's nest of spaghetti code.

00:04:19.280 And this is what happens with a lot of technology companies

00:04:21.640 that non-technical founders hire some guy off of Upwork,

00:04:25.240 some person in another part of the world and writes code

00:04:27.820 that is literally just copied and pasted scripts

00:04:30.880 from different websites and Google searches

00:04:32.860 from the developer and it is not well built.

00:04:35.920 So things that I want to look for,

00:04:37.220 I want to look for readability.

00:04:38.860 Is the code, like literally you could probably open up

00:04:41.440 the folder structure of the source code

00:04:43.260 and for you even kind of figure out like is it well designed?

00:04:46.600 But you want to hire somebody to do that

00:04:48.060 or have a friend check it out.

00:04:49.560 Is there proper documentation on the code?

00:04:51.440 Was it actually documented?

00:04:54.080 Did they use a modern day framework or is it, you know,

00:04:57.400 is it built on something from 1997 or is it built on

00:05:00.140 something that's somewhat modern?

00:05:01.480 Now if the code base is seven years old it's as expected

00:05:04.420 and it's probably gonna be reflected in the price

00:05:06.620 but you just want to know so that's the second thing.

00:05:09.220 Number three is an IP review.

00:05:11.520 So if they had anybody else build any part of the code base

00:05:16.400 then you need to make sure there's an IP assignment

00:05:19.020 agreement that was either in the vendor contract

00:05:22.940 with that developer and if they don't have any IP assignment

00:05:26.540 and there's other people that built it,

00:05:27.540 they need to go get those signed.

00:05:28.840 But IP ownership is so important because if you've ever seen,

00:05:33.540 I mean I have friends that have gone to court

00:05:35.640 around this challenge.

00:05:36.780 I mean Facebook is such an incredible story of how the

00:05:40.740 early twins and this other guy, they were part of it

00:05:43.940 and they got kicked out but they felt like they had

00:05:45.780 an ownership piece and it cost hundreds of millions of dollars

00:05:48.180 to settle those lawsuits.

00:05:49.640 You don't wanna have that happen to you.

00:05:51.580 So what typically happens is sometimes

00:05:54.360 third party developers build features

00:05:56.980 and they use a reusable framework and that framework

00:05:59.500 might be owned by the developer and the changes.

00:06:01.760 So you just gotta clear up all of that.

00:06:03.860 So IP review is a big part of potentially

00:06:08.360 buying a SaaS business.

00:06:09.800 And number four is customer support.

00:06:12.260 To me, there's so much gold that sits in regards to the

00:06:16.140 customer support process.

00:06:17.140 At the end of the day, a great SaaS business will live and

00:06:20.420 thrive based on how well they've treated their existing

00:06:23.380 customers and you can see from core metrics like time to first

00:06:27.120 response and the number of support tickets that are being

00:06:30.520 submitted on a weekly basis.

00:06:32.420 You can look through the support conversations to see how

00:06:35.960 well their team interacted and communicated and supported

00:06:38.700 their customers to make sure they've built connection

00:06:41.060 and solved real problems and didn't just dismiss or just bury

00:06:45.640 their heads in the sand because at the end of the day,

00:06:47.380 if they've maybe taken their eye off of the growth of the

00:06:50.240 business, it could be months that they might have not

00:06:52.340 responded to support tickets and you're gonna buy something

00:06:54.740 that's just on the verge, even if all the other areas are good,

00:06:57.780 just on the verge of a max exodus of customers and tanking.

00:07:03.260 So you don't want to do that and I would highly recommend you

00:07:06.460 look inside of the customer support tickets.

00:07:10.000 These are the four things you want to evaluate when looking

00:07:12.860 to buy a SaaS business.

00:07:14.600 Number one, numbers.

00:07:16.460 Two, source code.

00:07:18.100 Three, IP review, who owns the intellectual property.

00:07:21.940 And four, customer support.

00:07:24.040 As I mentioned in the beginning of this video,

00:07:25.080 I want to share with you my Idea to Exit mini course.

00:07:27.640 If you are software curious, then you probably potentially

00:07:31.080 have some ideas to build something yourself.

00:07:33.060 So you can click the link below to get access to that.

00:07:35.380 It's a three video series that talks about how to do true

00:07:38.680 customer validation, how to figure out to get the customers

00:07:41.720 to prepay to build the product.

00:07:43.560 So if you do that right and I teach about a framework called

00:07:45.960 the Clickable Prototypes and everything else you need to know

00:07:48.660 about how to launch, hire developers, manage the product

00:07:51.400 development process including potentially raising venture

00:07:54.700 capital and exiting your business.

00:07:56.400 So if you want to learn more about how I've done that over

00:07:58.740 the years, click the button below to get access to that

00:08:00.900 resource and if you like this video, click the like button.

00:08:03.740 be sure to subscribe to my channel.

00:08:05.780 If there's somebody else you think that this could serve,

00:08:08.140 feel free to share it with them directly as per usual.

00:08:10.740 I want to challenge you to live a bigger business

00:08:12.840 and a bigger life and I'll see you next Monday.

Dan Martell - December 17, 2018

How to Evaluate a SaaS Business For Acquisition

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